Issue 6 - April 2010
SEPA for Cash
Significant Growth in Cashless Payments in EuropeYet cash will remain predominant payment method in 2014
29.04.10 BY Rob Walker
One important objective of the SEPA initiative is to encourage a shift from cash to electronic payments. Yet despite political and strategic imperatives to reduce cash usage, and the fact that it accounts for a falling proportion of retail payments, cash is still the predominant retail payment method in Europe. It accounted for 78% of the 388 billion retail payments in the continent in 2008, or nearly 301 billion transactions, based upon an analysis of the latest data for 28 countries conducted by Retail Banking Research (RBR) for its new independent report The Future of Cash and Payments. In 2008 the total cost of distributing, managing, handling, processing and recycling cash and of accepting cash payments was €84 billion; equivalent to 0.60% of Europe's GDP or €130 per person. The report also forecasts that there will be a significant increase in the use of cashless payments in Europe between now and 2014, accompanied by a general decline in the number of cash payments. However, cash will remain the continent's main retail payment method even at the end of this period. Rob Walker summarises some of the report's main findings.***
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The continued dominant status of cash in Europe is despite sustained growth in the volume of cashless retail payments, which grew by 160% or a Compound Annual Growth Rate (CAGR) of 6.2% between 2000 and 2008, from 54 billion to 87 billion transactions. Of these, 78 billion retail cashless payments (90%) were in western Europe, 9 billion were in central and eastern Europe, and 56 billion (64%) were in the eurozone. As a comparison, retail cashless payments in the USA increased by a CAGR of 4.5% between 2000 and 2008, to 102 billion transactions.
Debit cards potentially offer best business case for cash substitution
The long-term future of retail payments in Europe depends partially upon the business cases for substituting cash payments at retailers' points of sale with those made by (contact or contactless) payment cards, mobile phones and other devices. Numerous issues apply to the establishment of these business cases, which are explored in the RBR report. Overall, the future usage of different retail payment methods will be influenced by drivers such as the Payment Services Directive; the Single Euro Payments Area; reduced MSCs and interchange rates for payment card purchases, and especially low-value transactions; and socio-demographic factors.
In 2008, debit cards were the main card type when measured by both purchase volumes and values in almost all European countries. The exceptions were France, Slovenia and Spain, where this was the charge card; Greece, where this was the credit card; and Ireland, where there were more debit card transactions but credit cards had the highest total transaction value.
Excluding atypical e-purse transactions, debit card purchases have the next lowest unit and marginal transaction costs (after cash) of all payment methods used at retailers' point of sale. They therefore potentially offer the best business case for cash substitution, which would be strengthened by increased debit card usage.
Increased debit card usage means banks might obtain processing economies of scale; consumers would have lower 'transaction fees' (calculated by dividing initial and annual card fees by the number of debit card purchases per year, and, in Norway, by adding purchase transaction charges); and retailers would benefit from the higher utilisation, and therefore the lower infrastructure costs per transaction, of their POS terminals and EFTPOS systems.
Financial crisis and recession will affect payments
The financial crisis and the accompanying recession have had a dramatic impact upon the economies of European countries. Their overall effects on the use of cash are unclear, but they are expected to have some impact up to 2011 on the use of cash and cashless payments. This is because there is evidence from earlier recessions of a 'flight to cash'; cash tends to be used to pay for low-value essential items rather than discretionary higher-value purchases; and in most European countries there is a correlation between higher GDP and greater use of cashless payments.
Giving explicit pricing signals would aid cash substitution
Although there are wide variations between the commercial practices of banks, acquirers and issuers in different European countries, in general European consumers are infrequently given explicit pricing signals in relation to their use of different payment instruments (except in countries such as Finland, Norway and Sweden), and even more rarely are they given such signals for the payment methods they use at retailers' points of sale.
There is widespread evidence, however, that the rate of decline in the use of cash as a retail payment method could be accelerated if transparent and direct pricing signals were given to consumers on the real costs of cash. In effect this means ensuring that there is a correct balance between the relative costs of an ATM cash withdrawal and a debit card purchase transaction. The potential prize is huge, for it is conservatively estimated that the provision of direct pricing signals to consumers on the real costs of cash would accelerate cash substitution by between 1% and 2% per year.
Contactless payments offer large opportunity
Contactless payments, where payment cards or other devices such as a mobile phones, go-tags or key fobs are used to make payments without the cards or devices being swiped or inserted at point of sale terminals or other acceptance devices, offer significant potential for cash substitution.
This is highlighted by the successful closed transport contactless card schemes that exist in cities such as Copenhagen, London (the Oyster card), Paris (the Navigo card) and Moscow, and that are planned for other cities such as Brussels.
Contactless card payments for non-transport applications, using general-purpose cards issued by members of national or international payment card organisations, EMV standards and non-proprietary technology such as RFID and NFC, are expected to take off in 2010 in France and the UK. Other countries such as Italy, Poland and Switzerland will be relatively active but some distance behind.
M-commerce pilots and trials have occurred in many European countries such as France, Germany, Italy, the Netherlands, Poland, Spain, Switzerland and the UK; and there are operational m-commerce arrangements in Belgium, Denmark and Spain. Transaction volumes to date have been low, however, and it is expected that it will be at least 2011 before there is a significant rollout of m-payments infrastructure and usage.
Cashless payments to grow significantly
It is forecast that there will be a significant increase in the use of cashless payments in Europe between now and 2014, accompanied by a general decline in the number of cash payments. However, cash will remain the continent's main retail payment method even at the end of this period.
In a "moderate' scenario" - which consists of an extrapolation of historic trends, a continuation of existing retailer- and consumer-related commercial practices, and an assimilation of known drivers and initiatives - the number of cash payments will decrease by a CAGR of 2.3% between 2009 and 2014, although they will still account for 63% of the estimated 414 billion retail payments in the region at the latter date. Cash usage will vary widely between different countries, however; it is forecast that cash will represent less than half of retail payments in 11 countries in 2014, with much lower proportions occurring in Finland, Norway and Sweden.
There are opportunities for greater levels of cash substitution in an "accelerated" scenario, but it is forecast that cash would still represent 56% of retail payment transactions in Europe in 2014 in this case.
It is forecast that there will be major changes to the European payments mix up to 2014. The rapidity of change will vary between countries, and for an individual country will depend upon a number of factors, including the impact of the financial crisis and recession on its economy; its banking and payments infrastructures; its banks' and acquirers' commercial practices; consumer payment preferences and habits; and the development and implementation of product and technological initiatives that may lead to cash substitution, such as contactless payments.
Many implications and actions
The movement away from cash and towards cashless payments up to 2014 will have implications for individual payment industry stakeholders - regulators, governments and public institutions, central banks, payment card organisations, retail banks, issuers, acquirers, retailers, consumers and others. In general, stakeholders will need to take the explicit and positive actions identified in the report if they want to accelerate cash substitution.
This article has been reprinted from Banking Automation Bulletin, January 2010.
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Other articles in this issue
29.04.10 Update EPC Plenary Meetings - Main decisions taken in March 2010 By Gerard Hartsink 29.04.10 EPC Annual Report 2009 - Driving forward the SEPA vision By Gerard Hartsink 29.04.10 SEPA Scheme Change Management 2010: Public Consultation - All stakeholders are invited to participate in the evolution of the SEPA Schemes By Herman Segers 29.04.10 Don´t get lost in Translation - EPC publication 'SEPA for the Public Sector' now available in all EU languages courtesy of the ECB By Herman Segers 29.04.10 European ATM Fraud Losses down 36 Percent - EMV rollout at ATMs in Europe is helping to reduce skimming losses in some SEPA countries By Lachlan Gunn 29.04.10 November 2010: Mandatory Reachability for cross-border Direct Debits - Commission services publish guidance note on application of Article 8 of Regulation (EC) No 924/2009 By Kevin Brown 29.04.10 PSD in Practice: a Follow-Up - Further clarification of key PSD concepts required to ensure full legal harmonisation By Ruth Wandhöfer 29.04.10 SEPA Global Impact: the View from Japan - EPC Newsletter series takes a look at the impact of SEPA beyond Europe By Kazushi Ishijima 29.04.10 Facing the Facts in April 2010 - The EPC Newsletter tracks the progress of SEPA implementation By Herman Segers 29.04.10 The Art of communicating SEPA - Who should communicate what to whom in the SEPA process? By Javier Santamaría 29.04.10 On SEPA and US Health Care Reform - The EC paper 'SEPA Migration End-Date': a commentary By Gerard Hartsink 29.04.10 Making the Connection - EPC cooperates with MobeyForum to boost mobile payments across SEPA By Dag-Inge Flatraaker and Ron van Wezel 29.04.10 New optional SDD Fixed Amount Scheme - Public consultation to close on 13 May 2010 By Javier Santamaría 29.04.10 Have it Your Way! - The EPC e-Mandate option: a secure way to authorise a SEPA Direct Debit payment By Björn Flismark, Javier Santamaría and Ulrike Linde
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